Investing Ideas India

Sunday, April 26, 2015

Lloyd Electric & Engineering (LEE)
is the largest producer of Coils/ Heat exchangers in India. Fully backward
integrated, LEE also serves the entire spectrum of HVAC&R (Heating,
Ventilation, Air Conditioning & Refrigeration) industry in India as well as
exports to some OEMs in US, Europe, Middle East and Australia. ‘Lloyd’ brand
has become more familiar in recent years with many new launches of consumer
durable products (mainly ACs and LED TVs) accompanied with a high(er)
advertising spend (Khushiyon ki guarantee campaign) on TV.

Thanks to restructuring/reorganising of
businesses within group entities undertaken 2-3 years ago (Between Fedders
Lloyd and LEE and then merger of some privately held companies into LEE), the
entire HVAC&R interests and capabilities of the group are now aligned in
LEE. LEE is the OEM for many other AC brands available in the domestic market
as well as for some brands in Middle East and South Africa. It also
manufactures ACs for the Indian Railways, Metro Rail and buses.

While the other segments (Heat Exchanger
and OEM) are also providing double digit growth, the fastest growing segment for
the company is the branded AC business which can help drive growth as well as margin
improvement. Over last nine months topline has growth by almost 25% - led by a
much higher growth rate in the branded consumer durable segement (40-45%). In
its conference call after six month results held on November 11, 2014 company
indicated a growth of 30-35% for overall business should be doable.

Even assuming growth numbers conservative
than management indicated, LEE stock trades at very reasonable valuations, in
our view. LEE ended the year FY14 with an EPS of Rs 25 on consolidated basis
(Rs 21 standalone). For the first nine months while the revenue is higher by
almost 25% the profits are slightly lower YoY. The best quarter for their
business is March followed by June (almost two third of revenue as well as
profits for the year are contributed by these two quarters) – so next six
months numbers will matter more than what they have reported in the last two
quarters.

While FY15 profits will probably be at
similar level to last year, we think company should be able to do EPS of more
than Rs 30 next year (FY16). At Rs198, the stock trades at a PE of less than
7x. EV/ Sales works to approx 0.5x and EV/ EBITDA of under 6x – on all parameters
it is much cheaper than almost all other consumer durable plays.

In March 2015, the
promoters have issued 60 lakh warrants to themselves and their group companies
at Rs152 per share. This itself will bring in over 90 cr which should help
reduce debt and save on the interest cost as well.We also believe a commitment to put 90 cr new
money by the promoters into a company which at that time had market cap of 500
cr (now 700 cr) is a positive sign and affirms the growth expectations
management indicated over the conference call. We believe this stock could see
significant upside over next few years.

Saturday, September 20, 2014

Potential returns in
this stock in our view are dependent only on one parameter. How much
can Archies sell online?

Why Archies? 1) Well recognized brand
across the country 2) Products which cater to and appeal to youth (which
contributes largely to online orders and sales) and 3) Gift items and products
which are most amenable to be ordered and sold online... small ticket size, no
fitting and return hassles etc.

And Archies gains hugely in the process
through a) additional sales and b) much better margins as its traditional sales
have to bear the cost of expensive store rentals and other overheads. Of course
the stores (Archies has about 240 of them across the country) help in terms of
brand reach; more so through company’s recent focus on big malls but Archies must
capitalise on these to sell more online.

Is Archies ready for this opportunity?
We don’t think so... its taken a few small steps... revamped its website (we
think there is huge scope of improvement still)... has appointed Mr Deepak
Thakkar of a Digital Media Agency (finesseim.com) as Non Executive Director and
has tied up with Flipkart, Snapdeal, Indian Gifts Portal, Ferns n Petals and a
few other online stores. But a lot more needs to be done to get its own portal and
apps (could only find one ill designed loyalty app) working, while tie-ups with
Flipkart and Snapdeal give the initial impetus.

So how much can Archies really sell
online? Archies reported on Sept 15, 2014 that it received 5281 orders online
in August 2014 vs 3058 in August 2013 and 2531 orders in July 2014 vs 960 last
year. These are small numbers, in our view and if Archies can get its digital
strategy right, it should get ready for much larger numbers. Projecting these
numbers can be challenging but in our view if Archies cannot get 10-15% of its
sales from online channels in two yrs, it probably hasn’t done things right!

Besides an extensive product line (for
gifting) and brand awareness the company has a strong balance sheet with
negligible debt. It has been profitable (EPS of Rs 2.07 in FY13 and Rs 1.55 in
FY14) and dividend paying (Rs 0.4 in FY13 and FY14). For a well recognized
brand, a significant potential ecommerce opportunity and almost 200 cr in
annual sales,, the stock is available at a market cap of 110 cr which we
believe is cheap.

Just because a company is sitting on a
big opportunity does not ensure its success. But the potential upside if they
are able to even partly capitalise on this opportunity can be huge and warrants
some exposure to this stock, in our view.

Sunday, March 23, 2014

HCL Info Version 2.0 | HCL Infosystems
is going through a major overhaul - In ownership, in business profile, in its
board. I think stock price will likely follow....

HCL Infosystems was formed in 1976 and
has played a key role in the computer industry (both hardware and software)
from the time the first computer was sold and first software applications
developed in India. It formed a JV with Hewlett Packard in 1991 (bought back HP
stake in 1998), set-up STP’s in Chennai and Coimbatore way back in 1990s and
set-up subsidiaries in US, UK and Australia (also in 1990s). In Early 2000’s
company was best known for its range of computer products (top PC vendor in
India). During early 2000’s HCL Infosystems also tied-up with Sun Microsystems
and Toshiba for distribution of their products in the Indian market. In 2006
the company signed up a long term distribution agreement with Nokia and this
saw a big boost to its financials over the next few years.

After recording its best performance yet
in 2007/2008 with annual revenues near 12,000 crores and net profit over 300
crores and a dividend of Rs 2 per quarter (yes a total of Rs8 dividend for
FY2008), the company has been downhill with each business presenting its own
challenges. Systems integration business in telecom faced receivable issues
especially in government contracts, Hardware competition increased and margins
vanished, Nokia distribution territories were diluted, Nokia’s business share
started declining. Revenues witnessed a decline and company reported net loss
in FY13.

HCL Info Version 2.0 - Business

Recent steps indicate a total revamp of
the company’s business focus which started almost 12-18 months back and is
starting to show results now (and could help improve financials significantly
over the next 1-2 years). In short company wants to reduce focus away from hardware
and hardware based systems integration business, and focus on Distribution
(with increased contribution from non-telecom part) and Services.

Winding down of hardware products and
inventory liquidation has resulted in some charges which company expects will
continue for another quarter. Some other hardware related SI projects could
take another 12 months as they are completed and money recovered. So the
transition could well take another 12 months but we believe improvement in results
will start showing from second half of 2014 onwards.

HCL Info Version 2.0 – Ownership

There have been changes in ownership of
HCL Infosys over last 2-3 years. Not all these details are in public domain.
First the promoter entity till few years back was ‘Guddu Investments (Pondi)’.
A search on google helped figure out some restructuring of this entity and a
subsidiary of HCL Corporation and as a result HCL Corporation has been the main
promoter entity for last few years. Our best guess is this resulted in more
control in hands of Mr Shiv Nadar, though all details are not available in
public domain. Over the last fifteen months HCL Corporation has also increased
its stake in the company from 42.85% to 49.97%... by buying shares from the
market. It is rare to see such consistent promoter buying which started in
March 2013 at price of around 39 and has continued even till last week. The
recent buying has been in another entity Vama Sundari Investments (Delhi) Pvt
Ltd. which is one of the promoter entities of HCL Technologies. Meanwhile AKM
Systems Pvt. Ltd., another promoter group entity (belonging to Malhotra’s)
disclosed selling some shares (on 17th Feb 204). Overall promoter stake has gone
up by over 7% over last 15 months with almost the entire 5% creeping limit for
FY14 being used. Should not be an issue as new limit will be available from
April 1, 2014!!

HCL Info Version 2.0 – Board

Various changes to the board have also
been announced over last few weeks. Latest changes announced on 21st March include
Mr Nikhil Sinha has been appointed as the non executive chairman of the board. Mr
Sinha is the founding Vice-Chancellor of the Shiv Nadar University and a Senior
Advisor to the Shiv Nadar Foundation and HCL Corporation. Mr Ajai
Chaudhary, one of the founders of the company had stepped down from this
position in 2012.

Three Non-Executive Directors, Mr. S
Premkumar, Mr. D.K. Srivastava and Mr. Pawan Kumar Danwar also joined the Board
of HCL Infosystems Ltd. Three existing Directors - Mr. J V Ramamurthy,
Mr. D.S. Puri and Mr. E A Kshirsagar has stepped down from the Board. Mr.
S Premkumar is presently the Group CEO of Apollo Hospitals Enterprise Ltd.,
where he works closely with the Board and is actively involved with the
transformation agenda across Strategic Go- to-Market initiatives, Customer
Experience, Strategic Partnerships and Globalization. Mr. D.K. Srivastava is
responsible for the Human Resources function of HCL Corporation & Shiv
Nadar Foundation and is driving strategies around talent, culture and
organizational effectiveness. Mr. Pawan K. Danwar is the Executive
Vice-President & CFO of HCL Corporation and Shiv Nadar Foundation. He
brings over 24 years of vast experience to HCL.

Earlier in February 2014, the Company
had announced the appointment of two new Independent Non-Executive Directors,
Mrs. Sangeeta Talwar and Mr. Kaushik Dutta on its Board.

HCL Infosys has also recently gone
through a composite scheme of arrangement which was approved by Delhi High
Court in Sept 2013 in which the Hardware Solutions business, Services business
and Learning business have been transferred to three wholly owned subsidiaries
HCL Infotech Limited, HCL Services Limited and HCL Learning Limited respectively.

HCL Info Version 2.0 – What to Expect

With various actions suggesting control
and involvement of Mr Shiv Nadar in HCL Infosystems, a comparison with the only
other listed entity he owns is very interesting. HCL Infosys market cap today (Rs850
crore) is less than 1% of that of HCL Tech. Total floating stock value today is
less than the dividend Mr Nadar receives from HCL Technologies in a single
year. Agreed they are different businesses and can’t be compared. Yet if Mr
Nadar gets involved to the extent seen so far, he has the experience and the
resources to change the face of this company.

We expect lesser focus on hardware and
hardware solutions business to help reduce losses over the next few quarters.
In addition the working capital released from these businesses should help pay
off much of the loans and hence reduce interest cost. If this transition proceeds
as planned and outlined by the company, we could see the company back in black
by end of 2014.

HCL Info has enormous brand equity and
reach to grow its Distribution and Service business – the new focus areas. Just
in the last quarter the company has signed up barnds like Canon (Printers), Lenovo
(YogaTablet), Huawei (videoconferencing), Datacard (IDcardprinters), Hamilton Beach,
Braun, DeLonghi, HarmanKardon. Little surprise then, that the non-telecom distribution
business has grown 60% in the last quarter while telecom distribution (Nokia)
declined by 7%.

For the company overall this transition
is likely to see further decline in revenues (as hardware solution business
drops further) but should help the company return to profitability by end of
2014. And hopefully those days are not far when it can reinstate its policy of
quarterly dividends!!

Friday, January 24, 2014

Heidelberg Cement India is 69% owned
subsidiary of Heidelberg... the German cement and building materials major and
one of the largest cement companies in the world. Heidelberg (the parent)
acquired a majority stake in Mysore Cement (Now Heidelberg Cement India) in
2006 through a preferential issue followed by an open offer at Rs54 per share
which worked to an EV/ton of just under US$100 per ton. Some of the other
acquisitions of Indo Rama and Cochin Cements were consolidated in this entity and
an expansion to capacity was completed last year (2013).

Having taken expansion at its capacities
in Jhansi (U.P.) and Damoh (M.P) which came to stream during 2013, Heidelberg Cement
India now has a total capacity of 6mt. Financials have been lacklustre for many
quarters, with sluggish demand and increasing cost pressures (especially power
and freight costs). For Heidelberg performance in 2013 got further affected by
higher depreciation and interest costs due to capacity expansion resulting in a
net loss.

Investments made over
last couple of years in brand and capacity will help marked improvement in
performance for Heidelberg Cement when the cement cycle improves, we believe. The
stock currently trades at an EV/ton of US$55 which we believe is cheap for an
MNC major. Not surprising then, that the parent has recently been increasing
stake through creeping acquisition route. The parent has bought over a million
shares (1.42m till 14th Jan) from the market over the last three
months at a price between Rs 37-40 per share. With just over a 69% stake now,
they could continue to buy shares from the market. Insurance Companies and FIIs
together hold another 11% of the stock. Limited float, also being further
reduced as parent increases stake is also positive for the stock, in our view.

Friday, May 17, 2013

Hitachi Home & Life Solutions India (HHLI)
is the Indian subsidiary (owned 74.25%) of Hitachi Appliances Inc. Japan and is
a leading player in air conditioning and refrigeration market in India. HHLI
has gained market share over the last few years and today has over 8% market
share by volume and over 10% by value in the Indian room air conditioner market.
The financials have been lacklustre over the last two years due to many
challenges – low growth phase for the industry, floods in Thailand last year
impacting the refrigerator business and more recently (July 2012) a major fire
in its AC plant in Kadi in Gujarat.

Much has changed for Hitachi and there
are multiple factors favouring the company today which we believe should help
performance going forward. First, depreciation of yen by almost 25% over the
last six months will result a significant saving in import cost and make
Hitachi much more competitive in the Indian Market. While it is difficult to
ascertain the exact amount of imports denominated in yen, even if we assume one
half of its approx 300 cr imports gain from yen weakness the gain will be
significant. Results for 4Q announced on 15th May 2013 show a 53mn
forex gain for the quarter. These gains should continue since the yen has
continued to depreciate further. Second, the company inaugurated its re-built AC
plant with a capacity to manufacture 6,00,000 units in a year at Kadi, Gujarat
in January. Mr. Motoo Morimoto (MD, HHLI) also detailed new inverter technology
split AC models which will be rolled out of this facility. Third, the prices of
copper which account for almost 10% of total cost have seen some correction in
recent weeks. Fourth, the company recently concluded its rights issue (at Rs130
per share); much of the issue was taken up by Hitachi Appliances thereby
increasing its stake in HHLI from 67.7% to 72.4% and total promoter stake
(including Hitachi India which owns 2.18%) to 74.25%. This should also help
reduce some borrowings taken recently presumably for rebuilding its plant.

First quarter (AMJ) is also the biggest
quarter for AC and refrigeration companies, and contributes to almost 40% of
the full year revenues as well as a better margin performance. HHLI has grown
ahead of industry even in last two years; however the margins got impacted due
to multiple factors mentioned above. For FY13, revenues grew over 16% YoY and
EBITDA margin expanded to 4.9% from 3.2% in FY12. EBITDA margins were much
higher in earlier years (8.5% in FY10 and 7.2% in FY11) and we believe they
could get closer to those levels in the current year. EPS for FY13 stood at
Rs6.7

Early anecdotal data suggests a good pick-up
in AC sales as summer season sets in. Perhaps due to a good AMJ quarter, these
stocks have also historically performed well in May to August period. We
recommend buying HHLI for a significant appreciation over a 3-4 month period.

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The views provided on this blog are for informational purposes only and should not be construed as investment advise. The author may or may not have interest/ownership in the stocks written about in this blog. No representation is being made that any investment be made on the basis of data or information on this blog. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.